Live Markets: Still a bit of risk premium in sterling ahead of spring statement

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25/02/2026 13:15

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STILL A BIT OF RISK PREMIUM IN STERLING AHEAD OF SPRING STATEMENT

British finance minister Rachel Reeves will deliver her spring financial statement next week and compared to her budget last autumn markets are pricing in much less chance of sterling weakness this time round, say analysts at Morgan Stanley.

However, they add, while the risk premium is less this time round, it isn't nothing, and they anticipate a slide in euro/sterling to follow the event just as it did in November, albeit in a more modest way.

The euro is currently trading at 87.17 pence, which, by Morgan Stanley's sums, is about 2.5% above where they estimate fair value, and has been nudging higher in the past few weeks.

That's well off the 4% above fair value it was in the run-up to November's budget mind you.

They also flag that two-week euro/sterling implied volatility (which covers the Spring statement) has been nudging up. It was last at 4.4 from 3.7 at the start of the year, but well off 6.3 in the run-up to November. EURGBP2WO=R

Similarly, MS say, risk reversals are pointing to a negative attitude to the pound, but again less than November.

So, given MS expect euro/sterling to rise in the medium term, how to position around the Spring Statement?

They conclude: "we think we could see a modest EUR/GBP 'slide' below 0.87 post event as investors unwind some of their hedges and reduce risk premium a bit further.

But we would look to fade this and we think that EUR/GBP below 0.87 would potentially offer attractive re-entry points for long positions."

(Alun John)

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